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OSV Passive Model Portfolio

At the end of last year, I decided to set up an OSV model portfolio to simulate a passive investing style. I found the companies by reading blogs and news articles and then ran them through my intrinsic value spreadsheet.

Passive investing has the advantages of:

  • being suited to really busy people
  • taking out emotions and you don’t check it everyday
  • not relying on mutual funds

Growth rates, discount rates and future predictions are all very subjective, but after several years of analyzing companies and learning a thing or two, the model portfolio is based on cheap stocks that are fundamentally well run.

To be honest, on average, I hardly spent more than 20 minutes on each one at any one time. Given that you know the basics of reading financial statements and can dedicate about 30 minutes of your day, I’m pretty sure anyone has the capability to simulate the same thing.

Portfolio Criteria

  • No net nets
  • No special situations
  • No bankruptcy plays
  • No sub $1 stocks
  • No shorts. Only long positions.
  • Fundamentally sound companies. This can be determined by referencing several ratios and quickly eyeballing the financial statements.
  • Company is cheaper than all three valuation methods of DCF, Graham formula and EPV.
  • Margin of safety exists for all three valuations.

Q1 Performance

Portfolio is tracked in Tickerspy but the interface doesn’t show exact figures, so you’ll have to let your eyes judge the value of the graph.

Ashamed to say that the passive portfolio is kicking my butt so far. The return YTD is over 12%.

OSV Model Portfolio Holdings

If you look at the holdings, I’ve mentioned a lot of them on the blog, especially as I go through the Forbes 200 best small companies; e.g. I would not have bought Jos. A Bank Clothiers (JOSB: 56.85 +3.89%) or Conns (CONN: 7.84 +0.13%) with my own money because of my uncertainty with the status of the company and stock price it was trading at, but take emotions out and it would have been a pretty good move.

Joe's Jeans (JOEZ: 2.74 +4.18%) was also a company I looked at separately and saw big potential. It is a designer brand jean company also suited towards curvier women. After I saw what happened with True Religion Apparel (TRLG: 29.94 -1.38%) since last year, JOEZ looked to have even more potential. It has run up 42% since I added it. (But since I didn’t buy with any real money, hindsight is always 20/20.)

OSV Negative EV Model Portfolio

Moving onto the 2nd model portfolio I set up. Don’t confuse this portfolio with the negative EV backtest. I created this model portfolio before any of the testing, so the criteria were very loose. Some of the stocks were the ones I held at the time so they were included. The others were chosen as random as a monkey throwing darts.

Neg EV Q1 Performance and Holdings

First quarter performance so far is on par with the market. It started off extremely well but many of the companies couldn’t meet the expectations of the market.

At the time of inception, I held Professional Detailing (PDII: 7.49 -0.40%), Insmed (INSM: 1.12 -4.27%) and Gravity (GRVY: 1.98 +8.79%) and it’s good to know that they are all top performers. I mentioned I sold PDII, which turned out to be a bad move. Shot up soon after I sold.

Opinion Regarding Markets

There are a lot of China names in this list but my opinion is that cheap Chinese stocks are not worth the investment. Shareholders come last and transparency is as clear as the puddle in the road. It’s one of the reasons why I’m trying to sell Linktone (LTON: 1.68 -1.18%) again.

Another trend that I am seeing is that the markets in 2010 are rewarding quality companies that were cheap or slightly cheap.

2009 was all about capitalizing on overreactions where cheap, junkish stocks performed the best.

Warning/Disclaimer

With respect to the model portfolios nothing is as easy as it appears.

I may make it sound easy but that is only because I’ve had so much time to play and understand every aspect of my stock spreadsheets. I’ve built up my knowledge with countless hours of reading. I also believe I have a good, not perfect, understanding of the correlation between discount rate, growth rate and future projections to estimate a price target range.

Everyone’s understanding level is different but some dedication, even 30 minutes a day, can help with your investments.

Bonus

Not confident with reading and understanding financial statements? Well great news!

Mariusz from Classic Value Investors has just released a free e-book on understanding financial statements for an investor and not an accountant.

The amount of work put into the e-book is absolutely stunning. Mariusz beat me to it, but after thumbing through it, I’m glad he did. The quality and value you get for free is astounding.

Do yourself a favor and go sign up with your email to download it.

Disclosure: Long INSM, GRVY, LTON, Bolt Technology (BOLT) at the time of writing.

Source: OSV Model Portfolio: Q1 Results